Exchange rates

1. Monetary systems An international monetary system is, by definition, a set of inter-state arrangements and practices between different economic actors that enable and supervise international economic relations. Its existence is justified by the need to control global monetary exchange in order to stabilize the operation of international trade. Over time, it is first application of a type in the 1870s, when German power adopted a strict monetary system based on the gold standard, that is to say a model where we define the monetary unit at a fixed weight of gold and where the whole issue of money is in return and exchange guarantee gold. This system lasted until 1914. Following the First World War, we opt for the system of the gold exchange standard. It is based on the fact that some hard currency can play the role of gold as a standard. In 1922, only two currencies could play this role: the U.S. dollar and to a lesser extent the pound sterling. Now it was possible for countries to establish reserves in hard currency convertible into gold. 
But the great crisis of 1929 has challenged the entire system. Currency crises gradually affect all countries, many cases of devaluation of currencies are recorded along with a case of hyperinflation, the one experienced by Germany in 1926. It is therefore the realization that the international monetary system must have a stable exchange rate and sufficient liquidity to avoid a catastrophe like the Great Depression. It is on these premises that created a new system in 1944 from a conference in Bretton Woods, which lasted until 1971. The latter relied on four principles. Of these, the free convertibility of currencies, a fixed exchange rate, which is denoted by the equality of the exchange value of each currency defined in relation to gold or the dollar, the dollar defined in gold and fixed the creation of the International Monetary Fund. It is responsible for ensuring compliance with the rules and lend money to debtor countries the necessary foreign exchange interventions on the foreign exchange market. Questioning the system comes from the loss of economic confidence in the dollar. That President Nixon in 1971 denouncing the gold convertibility of the dollar due to the acceleration of the decline in stocks of U.S. Federal Reserve. This marked the end of Bretton Woods and after attempts to design the system, led to the agreements of Jamaica from 1976 that still survive. They formalize the abandonment of the system of fixed exchange rates for a model of flexible exchange rates, defined as a monetary system where the currency exchange rates vary freely according to supply and market demand.
2. Conceptualization of the exchange rate To follow the concept of exchange rates, it is important first to define this key concept. The definition, both simple and comprehensive is the site of the Department of Finance Canada, "is the price of the currency of a country, expressed in relation to another currency, depending on supply and demand, which are influenced by economic fundamentals, such as differential interest rates, inflation on the trade balance and the prospects for economic growth. " So I will try to define these macroeconomic factors that influence the variation of the exchange rate, using the model of the exchange rate of the Canadian dollar. Canada has a floating exchange rate, that is to say that our currency is pegged to another currency. Thus, the exchange rate is affected by supply and demand for Canadian dollars on the foreign exchange markets. For example, if demand exceeds supply, the dollar will increase, while if the supply exceeds demand, it will decrease. The first economic factor that affects supply and demand for money is the interest rate differential, that is to say, the difference between the interest rate of domestic currency vis-à- vis the interest rate of foreign currency. For example, if interest rates are higher in Canada than in other countries, investors will be inclined to choose to invest their funds in our country, which will therefore increase the demand of the Canadian dollar. However, do not neglect to take into account the expected rate of inflation. Thus, if the latter is higher, even if interest rates are higher, this may hinder investors because they can anticipate a possible deterioration of the dollar caused by inflation. The second factor to consider is the economic situation of our trade balance. For example, if world prices of our exports rise relative to the cost of our imports, we will win more with our exports than we pay for our imports. Thus, the more we will benefit from this exchange, the more the demand for Canadian dollars is strong. The last economic factor to consider is the prospect of growth. For example, if investors have more confidence in the future strength of the Canadian economy, they are more likely to buy Canadian assets, resulting in a subsequent increase in our dollar.
However, it is important to note that more and more specialists exchange rates agreed to add other than macroeconomic factors explaining the variation in exchange rates. Thus, some authors consider it necessary to take into account non-monetary factors to explain changes in exchange rates, such as, for example, the growth of international capital market, new fiscal measures, the discovery of important natural resources or uncertainty in equity markets ... Other researchers even say that exchange rates are influenced by beliefs and expectations that are created by themselves rather than the fundamentals of the economy. What is called "bubble" that is, the belief that asset prices will rise, for example, would increase its demand and thus higher prices.
3. The international market for foreign exchange We will now move to the international market exchange, or the Foreign Exchange (also known as the "Forex"). This market is split into four broad categories Spot rates, forward contracts, the foreign exchange swaps and derivatives. Before discussing each, it is important to note that the price of one currency (the rating) can be found in two ways, either some (eg, 1 USD = $ 0.96 CAD) or uncertain (eg : $ 1.04 CAD = 1 USD). The standard requires that we use some scoring when we have an array of exchange value, except when speaking of pounds and Euro, or the value is determined using an indirect quotation. First, we can define the market as the spot market where you buy / sell foreign currency for immediate delivery (which means 2 days, except between Canada and the United States, which requires a period of 24 hours). Futures contracts (forwards), when to them, means that you buy today, but the delivery will take place later. It is important to understand that the price of futures is not the spot rates that are expected to do in the future (in one month, three months or a year), but a mathematical application that represents the difference between interest rates in both countries. For example, if interest rates are very low in Japan, we must compensate our investment by receiving, later, Japanese yen, which is more valuable. As for the swap, it is a dual foreign exchange transaction in which two operators of the currency exchange today (Operation Spot rate) and will re the same operation, in contrast, more later (futures). This is often used by companies and financial institutions that trade in the same currency but the dates are not the same. It is important to mention that these operations represent 50% of trade exchange in the world. The last category is what the Forex is now known as derivatives. These can consist mainly of futures (which are like forwards, except they are traded on the Stock Exchange rather than directly between the seller and buyer), currency options (which gives the right, not the obligation, to sell (put option) or buy (call option) currency at a predetermined price) and currency swaps (where the exchange of interest rates in the medium to long term in two different currencies, compared to the SWAP Exchange of exchanging interest and the value of a loan or deposit at two points in time in two different currencies).
4. Case study: the Asian crisis 90 The decade was marked by the emergence of the countries of South and East Asia in the global economic system. The Asian tigers, including Thailand, have experienced during this period of strong economic growth, a reasonable inflation rate, a healthy financial situation and an important contribution of foreign capital. The 1997 Asian crisis takes root in Thailand spread to the Philippines, Malaysia, Indonesia, Hong Kong and Korea, then to run aground on the coast of Russia and South America. By 1996, there speculative bubbles in Thailand stock market and real estate. This real estate bubble combined with the accelerated pace of construction in this area leads to a sharp drop in prices. Indeed, with the construction that is increasing continuously, the increased supply has no choice but to eventually reduce the value of assets in this sector. The Bath, who like most regional currencies, is pegged to the U.S. dollar. This results in an overvaluation of the currency. To support the value of its currency, the central bank of Thailand spends more than $ 16 billion, half of its foreign reserves to prop up the baht. Maintaining hard to parity with the dollar continues to rise again makes Thailand attractive investments. However, while the reserves of Thailand continue to flow and bank failures is a major problem, the government hides investors the declining situation of the country. The maintenance of Bath becomes too heavy and the government is forced to float the Bath in July 1997 to boost exports, which account for 65% of the country's economy. The result is the collapse of Bath carrying with it the Thai economy. In short, the financial fragility has played a major role in the crisis erupted in Thailand. Indeed, many financial institutions and companies had contracted without proper coverage, foreign currency borrowings that made them vulnerable to depreciation of the currency. In addition, it was mostly of short-term debt while the assets were in the longer term, hence the risk of a liquidity crisis. Then, before the crisis, prices had soared on the stock and housing markets and a sharp fall in asset prices was to be feared. Finally, the allocation of credit was often inadequate, contributing to the problems of increasingly desperate banks and other financial institutions.